SA’s energy future: RMB’s Keith Webb on diversifying the mix

JOHANNESBURG — Load shedding has been on many South Africans’ lips over the last few weeks. Rolling blackouts commenced in late 2018 again as Eskom grappled with its coal supplies and power plant breakdowns. But looking to the future at times like this is important. And in this interview, RMB Investment Banking Transactor Keith Webb looks at what the years ahead hold for South Africa’s energy mix. It’s potentially a more promising picture than the one we have today with prospects for wind, solar, gas and even clean coal playing a bigger part in our lives in future to meet the demands of the economy. – Gareth van Zyl

It’s a pleasure to welcome Investment Banking Transactor, Keith Webb from Rand Merchant Bank. He’s on the podcast with me from Johannesburg.

Keith, we’re going to be talking about the energy sector in South Africa and its future in terms of natural resources such as solar, wind, gas and clean coal. Obviously, we have the issue of load shedding right now, which is very topical, but we’re going to be looking forward to the future of renewable energy. We’ve had the issuance of the draft Integrated Resource Plan (IRP) for the energy sector and we’re expecting the imminent release of a final IRP. As somebody who is in investment banking, what are the key things that stand out for you in the IRP right now?

Well, the first thing to point out with the IRP is that there is an increasing diversity of sources of energy that South Africa is moving towards. We’ve historically been very coal-focused (which comes with its own environmental challenges), but I think what we need to appreciate is that South Africa has many wonderful natural resources in the solar and wind space as well. This is where you will start seeing those technologies and resources come into the fore.

Where do solar and wind fit into this mix? We hear all the time about how the costs of these energy sources are falling and every few months we hear about a new solar plant being switched, usually in the Northern Cape somewhere. But will these clean energy sources ever make a tangible difference in South Africa?

Absolutely. The cost of these, as you say, has fallen dramatically and maybe it’s the first point to dwell on for a second. The initial rounds of procurement of the solar and the wind resources were at a high level to encourage entry into the sector. What we’ve found is that there’s been a lot of learning and economies of scale which means that the price of these solar and wind plants are now really incredibly competitive. In my view, they offer the cheapest cost of electricity that we currently have.

If you look at the draft IRP, the percentage of energy that’s expected to come from solar and wind resources is currently quite small sitting at below 5%. But I think that’s going to head in the region of 15% to 20% in 10 to 20 years’ time, which is a good mix. If you look at coal as the predominant source right now, it is anticipated to drop from the current 80% or 90%, down to roughly 50%. Therefore, the balance of energy is going to come from gas and other sources going forward.

In terms of the drop in the future demand for coal, how much does that relate to the global banking sector? We’ve seen reports of financial institutions that are less inclined to finance energy projects that are coal intensive. What do you make of that?

Obviously, the source of coal energy currently in South Africa is coming from Eskom, but anybody funding these projects has put quite stringent requirements on South Africa to improve the energy mix to include more renewables. Looking at the project financing of a new coal plant though, it becomes incredibly tough. International investors are very quickly moving away from coal-fired power stations. In South Africa we obviously have a big coal resource that we need to recognise, so we are still looking at funding coal-fired power stations. I do however think that we need to insist on industries using the latest and greatest new technology to keep the coal as clean as possible.

Can you tell us more about clean coal — is this going to be a major trend moving forward do you think?

These are massive projects, and the rightful owner of these new technologies really should be Eskom, which has supposedly the balance sheet to be driving these. But to give you a sense of what clean coal is: It really is about moving the technology into a much more efficient burn technology which is better known as supercritical, ultra-supercritical technologies. That’s on the one side. The other side is very much, what we call emissions abatement scrubbing which involves the removal of pollutants from the exhaust gases.

What about gas energy? We’ve heard about these big gas fields that have been found off Mozambique’s coast. There’s been talk for some time that South Africa might have similar resources. What future role does gas play in our energy mix?

Well, we can separate that into two. Whether South Africa has gas resources or not I think that’s a much longer-term play. Whether we have shale gas or not, we don’t know how that’s going to play out. It could be a 10 to 20-year programme if it does. But when we set up the gas sector, we need to really think about it from a Liquefied Natural Gas (LNG) point of view where the natural gas would typically be liquefied at source in for example Mozambique, Angola or America to be transported and traded as a global commodity. The LNG would typically be shipped into South Africa, and then combust to produce energy. We are already in a position to complete these steps in the supply chain.

Do you think that the government and local industry is doing enough in South Africa when it comes to ramping up clean energy and developing technologies around it?

From my point of view, no, I don’t think so. While we have huge solar and wind resources, what we should do is to also develop the supply chain, ie. manufacturing the components that go into the solar and wind plants in South Africa. Obviously, a lot of these technologies have now been developed internationally, and we are to some extent playing catch up, but that shouldn’t stop us from (just like the motor manufacturing sector) assembling these components for our own use and potentially even for re-export either regionally or internationally.

What do you think is holding that back?

It’s a typical South African issue that we have where we try to build these industries based on our own needs/demand (which turns out to be quite lumpy). Then, as is the case in the IRP, we have a two or three-year gap before we continue to procure wind power in South Africa. Now that two-year gap means that those manufacturing for the wind industry have nothing to do, so they effectively shut down. We’ve already seen that happening as the government and Eskom held up signing the recent rounds of renewable energy. So many manufacturing plants have had to shut down because the procurement from the South African energy sector didn’t materialise. We need a consistent level of procurement of renewable energy to encourage those supply chains to develop.

Where does nuclear fit into all of this or is it completely on the backburner these days?

It seems to be a much-politicised topic. Obviously, we have nuclear energy (in the form of uranium) in South Africa and I think that’s going to be around for a long time. But there’s a fundamental issue with nuclear at the moment, which is that in order to buy it to make economical sense, your projects have to be on a massive scale. I don’t see that Eskom, South Africa nor the banking sector have enough capital to fund these massive projects.

The other issue with nuclear, of course, is its ability to deliver a fixed price solution. When we talk renewable energy, we get our contractors to commit to a fixed price so that we know exactly how much it’s going to cost. What we’ve seen in the nuclear sector are delays and huge cost overruns, which then become impossible for anybody to understand how much it really is going to cost at the end of the day.

How does RMB play in the energy sector currently? Are there any opportunities that you see moving forward in South Africa as well in terms of the general energy mix that we’re moving towards?

We are very involved in all of the components of the IRP – not only supporting Eskom, but also in terms of all of the renewable projects. We’re a big funder of those projects; in fact, probably a bigger funder than Eskom. We are very excited about the prospects of the gas project and any new technologies that are coming to the fore. We were recently talking about the storage side of things, particularly about how the battery storage technologies are relatively nascent, but like the renewable sector, they’re developing so quickly that we might find the costs come down equally as quickly as the renewable sector.

We obviously know that the key issue with solar is that at night the sun doesn’t shine. Therefore, storage is going to be critical moving forward isn’t it?

Yes, absolutely. It can be done on several levels. For example, let’s say a cloud goes over the solar panel, you might find an instantaneous drop. A lithium-ion battery solution could smooth this anomaly out very nicely. Let’s say the sun is at its hottest and delivering the most energy at twelve o’clock, to shift the load to the peak times of 19:00, a battery storage solution would make the most sense. In South Africa we have a solar storage type solution that has already been procured which is quite useful at shifting loads. Whether you can do the longer-term seasonal type of shift, I don’t think that you can do that with a battery type solution.

Just as the last question, looking at everything that we’ve discussed, are you feeling confident that South Africa is moving towards a direction where we will have a more sustainable energy future that is cleaner, but which also meets demand?

I think so. The industry definitely needs a restructure to encourage that kind of, let’s call it the democratisation of the energy sector where we move away from a single energy source. We need to effectively create a buying system, which is outside of Eskom that can then procure whatever source of energy is the cheapest source at the time, or the source of energy that is going to balance the grid at the time.

Keith Webb, thank you so much for taking the item to chat to us today about the future of the energy mix in South Africa.